Answer Key

2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

Section A
Each question carries 1mark :
1. Define Fixed Cost.
Fixed costs are the costs that don’t change with the change in output of the good. For eg.
Interest, salary of permanent staff, etc.
2. Define Variable Cost.
Variable costs are costs which change with change in the output of a good. For eg. Cost on raw
materials, labour, etc.
3. What does shaded area show in the figure alongside?
a) TFC Fig .cost MC
b) TVC
c) TC
d) ATC
O Output
4. Why does AFC fall as output rises?
AFC = TFC/Output
Now as output increases, AFC falls as TFC (numerator) remains constant whereas the output
(the denominator) increases.
5. Define Marginal Cost.
Marginal cost is the addition to total cost of producing one more unit of output.
6. Fixed costs are also known as
a) Supplementary cost
b) Overhead costs
c) Indirect costs
d) All of these
7. TC is the vertical submission of :
a) TFC &TVC
b) AFC &AVC
c) TVC & AVC
d) None of these
8. What is the behaviour of total variable cost as output increases?
There are two phases in the behaviour of TVC as output increases:
First phase, TVC rises at a decreasing rate.
Second phase, TVC rises at an increasing rate.
9. The total cost at 10 units of output is Rs 55.The fixed cost is Rs 5. The average variable
cost at 5 units of output is
a) Rs 25
b) Rs 6
c) Rs 5
d) Rs 1

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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

10. Read the following statement -Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:

Assertion: AFC is a U shaped curve

Reason: AFC = TFC/Q
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A)
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true

11. Read the following statements carefully:

Statement 1: At zero output, fixed costs are incurred.
Statement 2: Variable costs are incurred before production is started.
In the light of the given statements, choose the correct alternative from the following:
a) Statement 1 is true and statement 2 is false
b) Statement 1 is false and statement 2 is true
c) Both statements 1 and 2 are true
d) Both statements 1 and 2 are false
12. The cost of zero level of output is equal to which cost?
Fixed cost
13. Why is TFC curve parallel to X-axis?
Fixed costs remain fixed. TFC curve remains constant when the output is increased. thus TFC
curve is always parallel to the X-axis
14. Why are total cost curve and total variable cost curve parallel to each other?
Since the distance between TC and TVC remains the same (i.e. equal to TFC), the two curves
never intersect each other because TFC can never be zero. Hence the two curves remain parallel
to each other.
15. What happens to the difference between Average Total Cost and Average Variable cost as
production is increased?
AC= AFC+AVC.
As output increases, AFC continuously fall, because TFC is constant. Consequently, the
component of AFC in AC tends to shrink. This brings AC closer to AVC, reducing gap
between both the curves.
16. What happens to the difference between Total Cost and Total Variable cost as output is
increased?
As output is increased difference between Total Cost and Total Variable cost remains constant

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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

as TFC remains fixed even with increase in output.

17. What is the relation between Average Total cost and Average Variable cost, if Total fixed
cost is zero?
If Total fixed cost is zero, Average Total cost and Average Variable cost will intersect each.
18. Why should TVC increase at a decreasing rate in the initial stages of production?
In the initial stages of production, a firm may be enjoying increasing returns to a factor. It is a
situation when MP tends to rise. Cost is just opposite of productivity. Rising MP means falling
cost. When the cost of producing an additional unit is falling, TVC should be increasing only at
the decreasing rate.
19. How is TFC affected when output is increased?
TFC being a fixed cost remains unaffected with the increase in output.
20. What is the shape of the AFC curve?
AFC curve is downward sloping rectangular hyperbola.
Each question carries 3/4 marks:

21. Distinguish between fixed costs and variable costs.

Fixed cost (FC) Variable cost (VC)
Fixed Costs are the costs which do not Variable costs are the costs which
change with change in the output of a change with the change in output of a
good. good.
Fixed Costs are incurred on the fixed Variable costs are incurred on variable
factors of production like machines, factors of production like raw materials,
buildings, insurance etc. labour etc.
FC cannot be changed during short run. VC can only be changed during short
run.
FCs exists even at zero level of output. VCs doesn’t exist at zero level of
output.
Graphically, TFC curve is parallel to x- Graphically, TVC curve is inverse S-
axis. shaped.
22. What is the relationship between AVC and MC? Represent diagrammatically.
1) If MC is less than AVC then AVC falls.
2) If MC is equal to AVC then AVC is constant.
3) If MC is more that AVC then AVC rises.
Diagram cost y AVC

Cost MC

0 output
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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

23. Explain the relationship between AC and MC with the help of a cost schedule.
i. Define AC and MC
OUTPUT AC(Rs) MC(Rs)
1 12 10
2 8 6
3 6 2
4 6 6
5 8 16
6 10 20
ii. Both AC and MC are u shaped because of law of variable proportions.
iii. As long as AC is greater than MC, average cost falls. AC curve is above MC curve.
iv. AC=MC When AC is at its lowest point. Hence MC curve cuts AC curve from below at its
lowest point called point of optimum capacity.
v. When MC is greater than AC, AC rises. MC pulls up AC. Hence MC curve is above AC
curve.
vi. MC reaches its maximum point before AC reaches its maximum point.
24. Distinction between explicit cost and implicit cost. Give examples
Explicit costs -The direct expenditure on actual purchases or hiring of inputs is called explicit
costs. It is recorded in books of accounts.
For example, salaries of employees, expenditure on raw materials.
Implicit costs -The indirect expenditures refer to the estimated value of inputs provided by the
owners which do not find place in the account books, it is called implicit cost.
For example, estimated salary of the owners, estimated interest of financial investment.
25. Define Variable cost. Explain the behaviour of TVC as output increases.
Variable costs are costs which change with change in the output of a good. For e.g. Cost on raw
materials, labour, etc.

The behaviour of TP is derived from the behaviour of TP implied in law of Variable Proportion
There are two phases in the behaviour of TVC as output increases.

First phase, TVC rises at a decreasing rate.

TVC rises at decreasing rate .It means every new output produced involves a lower cost It is
because of the increase in the efficiency of variable input due to proper utilization of fixed
inputs, specialisation and division of labour.

Second phase, TVC rises at an increasing rate.

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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

This means that every new unit of output has a higher cost as compared to the previous unit.
This is on account of fall in efficiency of the variable input due to overutilization of fixed inputs
Diagram y TVC

cost

O X Output
26. Draw Total Variable Cost, Total Cost and Total Fixed Cost curves in a single diagram.
Total cost is the sum of TFC and TVC. TC starts at the point of fixed cost. It initially increases
at a decreasing rate then increase at an increasing rate. TC is always parallel to TVC as the gap
Indicates TFC, which is constant at all levels of output.
Diagram

TC
TVC

Cost TFC

0 X output
27. A producer starts a business by investing his own savings and hiring the labour.
Identify the implicit and explicit costs from this information. Explain.
a. Interest on own capital: Implicit Cost and
b. Wages paid to Hired Labour: Explicit Cost
(Explain wrt definitions of explicit and implicit cost.)
28. Giving reasons, state whether the following are true or false:
a) The difference between TC and TVC falls with increase in output- False. It remains
constant due to constant TFC at all levels of output. TC=TFC+TVC.
b) AVC falls even when MC is rising, but is below the AVC – when MC starts rising,
AVC is above MC because per unit variable cost falls at lesser rate than fall in addition
unit of hiring labour. AVC rises only after MC cuts it from below at its minimum point.
29. Why is the MC curve U-shaped in the short run?
MC curve is u shaped. It initially decreases with the increase in output and then rises with the
output. It is u-shaped because of law of variable proportions.
Initially the firm experiences increasing returns because of division of labour, specialization,
better utilization of fixed factors etc. as a result, the cost of production of additional units
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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

declines. Hence MC curve falls. Later the firm experiences diminishing returns because of
optimum utilization of fixed factors, congestion and overcrowding of variable factors. As a
result the cost of production of additional units goes up. Hence MC curve rises.
Diagram Y
MC
cost

0 x output

30. Why does the difference between ATC and AVC decrease with an increase in the level of
output? Can these two be equal at some level of output? Explain.
AFC is Total fixed cost divided by units of output.. AFC = TFC/Output. As output increases
AFC falls as TFC remains constant and the output continues to increase.
AVC is total cost divided by output. AVC = TVC / Output. As output increases AVC falls
initially and then rises after a level of output. It is a U-Shaped curve.
Because of falling AFC, ATC and AVC will move closer to each other but will never meet or
intersect as AFC can never be zero. y ATC

Cost AVC

0 X Output

31. How is economic cost different from accounting cost? Explain.

Economic cost is always measured as opportunity cost. Opportunity cost of an activity is
measured in terms of the total sacrifice involved in undertaking that activity. Thus economic
cost of producing a given output always implies opportunity cost of producing that output and
is to be measured in terms of the sacrifice involved in producing that output. From producers
point of view the sacrifice involved both implicit and explicit cost, on the other hand
accounting cost includes only explicit cost i.e. cost which is recorded in the books of accounts.
32. What is the behaviour of a) Total Fixed Cost and b) Average Variable Cost as more and
more units of a good are produced?
a) Total Fixed Cost
Total fixed cost remains constant at all levels of output.
TFC curve therefore is parallel to X axis.., It means whether output is zero, OQ1 or OQ2 or
even higher TFC remains fixed at OF .It does not change with change in output
Diagram y TFC
Cost
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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

0 q q1 x output
b) Average Variable Cost
AVC equals to TVC divided by output.
As output expands AVC, falls initially and then rises after a level of output. It is a U shape
curve.
Diagram with brief explanation.

Y Cost
Cost

O x Output

33. Define fixed cost. Give an example. Explain the behaviour of average fixed cost as output
is increased.
Fixed Costs are the costs which do not change with change in the output of a good.
Example- salary of permanent labour.
AFC- Definition, formula, dia. with explanation.

Each question carries 6 marks:

34. Giving reasons, explain whether the following statements are true or false.
i. As output is increased, the difference between ATC and AVC falls and ultimately
becomes zero –
False. As output is increased, the vertical difference between ATC and AVC goes on
decreasing. The reason is that ATC-AVC = AFC and AFC by definition goes on
decreasing as output is increased but it is never zero since TFC is never zero and hence
the difference between ATC and AVC cannot be zero.
ii. Total Cost curve is always upward sloping –
True. Total cost cannot decrease with increase in production of units of output. Hence it
is always upward sloping. It is an upward sloping inverse S shape curve.
35. Why is AC curve U-shaped?
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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

Short run average cost is a U-shaped. It means that at first, this curve tends to fall and after
reaching the minimum point, it begins to rise.
It finds its explanation in the law of variable proportions.

The law of variable proportion states that initially (so long as fixed factor remains
underutilized), MP (marginal product) of the variable factor tends to rise. And, eventually (after
fixed factor and variable factor reach their ideal ratio or optimum ratio), MP of the variable
factor tends to fall.

Let variable factor be L (Labour) and fixed factor be K (Capital). When MP L tends to rise it
means more of output per every additional unit of L. Rising MP also implies an increase in AP.

It means, requirement of L per unit of output tends to fall (in a state of increasing returns to a
factor). Ultimately it means cost of the variable factor L per unit of output tends to fall. Or, that
AVC tends to fall.

Exactly opposite is the situation when diminishing returns are in operation. Thus, AVC assumes
U-shape. AC= AVC. AFC must always fall as output increases, and its component (in AC)
tends to gradually shrink with increase in output.

Thus, initially both AFC and AVC tend to fall. According, AC (which is the sum aggregate of
AFC and AVC) also falls. Subsequently, AFC tends to be a very small component of AC. So
that, even when it is falling, it causes little impact on the rising AC (owing to rising AVC).
Hence, the final conclusion that AC (along with AVC) tends to be U-shaped in accordance with
the law of variable proportions.

Y A Cost
Cost

x
Output

36. Identify the following as Fixed and Variable Cost.

a)License fee- Fixed Cost
b)Transport expenses – Variable Cost
c)Minimum electricity bill – Fixed Cost
d)Depreciation charges – Fixed Cost
e) Salaries to permanent staff – Fixed Cost
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 Answer Key
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Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

f)Cost of Fuel- Variable Cost

Section B
Each question carries 3/ 4 marks:
37. Given the Total Fixed Cost is Rs.30, complete the following table:

Output(Units) TVC=AVC. Q TC(TVC MC(TCn-

AVC(Rs.) +TFC) TCn-1)
0 0 0 30 0
1 20 20 50 20
2 15 30 60 10
3 20 60 90 30
38. Given below is the cost schedule of a firm. Its AFC is Rs.20 when it produces 3 units.
Calculate its Marginal and Total Cost at each given level of output.
Output (units) 1 2 3
AVC ( Rs.) 30 28 32
TVC( AVC . Q ) 30 56 96
AFC (TFC/Q) 60 30 20
TFC ( AFC . Q ) 60 60 60
TC ( TVC +TFC) 90 116 156
MC(TCn- TCn- 90 26 40
1)
39. A Firms average fixed cost of producing 2 units of a good is Rs. 9 and given below is its
total cost schedule. Calculate its average variable cost and marginal cost for each of the
given level of output.
Output (units) 1 2 3
TC 23 27 30
AFC 18 9 6
TFC(AFC .Q) 18 18 18
TVC( TC –TFC) 5 9 12
AVC (TVC/Q) 5 4.5 4
MC(TCn – TCn-1) 5 4 3
40. Calculate MC at each level of output:

Output ( Units) 1 2 3

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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

TC ( Rs ) 80 96 120
AFC ( Rs) 60 30 20
MC (TCn – TCn-1) 80 16 24
TFC(AFC.Q) 60 60 60
TVC ( TC –TFC) 20 36 60
AVC (TVC/Q) 20 18 20
41. Calculate TVC and TC from the following Schedule with Fixed Costs as Rs. 10.

Output (units) 1 2 3 4
MC (Rs.) 6 5 4 6
TFC (GIVEN) 10 10 10 10
TC 16 11 15 21
TVC(TC-TFC) - 1 5 6
42. Complete the following table:
Output (units) AFC AVC TVC MC AC TC
1 120 40 40 40 160 160
2 60 56 112 72 116 232
3 40 54 162 50 94 282
4 30 54 216 54 84 336

Each question carries 3 marks:

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 Answer Key
2023-2024

Class: 11 Worksheet Number: 11/Eco/10/AK

Subject: Economics Chapter: 10 – Cost

43. Show with the help of a numerical example that average cost is constant when marginal cost is
equal to it.
Units of output Total cost Average Cost Marginal cost
0 14 - -
1 20 20 10
2 28 14 8
3 34 11.3 6
4 38 9.5 4
5 42 8.4 4
6 48 8 6
7 56 8 8
8 72 9 16
When AC does not change MC=AC, It happens when falling AC reaches its lowest point .At
the 7th unit AC does not change .it sticks to its minimum level of Rs, 8 . Here MC is also 8
44. Comment on the following statement “in the short run, a firm total cost will be zero if the
firm chooses to produce nothing.”
This statement is false because in the short run, even at zero level of output, there exists some
fixed cost although the variable cost is zero. Hence, a firm’s total cost cannot be zero even if
the firm chooses to produce nothing.
TC = TFC+TVC
Section D
Each question carries 3 marks:
45. A firm withdraws Rs.10000 from its fixed deposits with the bank and uses the money for
the purchase of factory equipment. Identify the types of economic cost of this investment.
Withdrawal of funds from the deposit for the purchase of a factory equipment involves an
element of explicit cost which is equal to the price of factory equipment
It involves an element of implicit cost equal to the loss of interest on the funds withdrawn from
the bank.

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